UWB: Thumbs up

Market cheers United Western Bank's merger with IDBI, while UWB shareholders set to enjoy good compensation

Shareholders of United Western Bank have got a pleasant surprise: They will be compensated "" an impressive 27 per cent premium to the share price before the government imposed a moratorium on the bank. No wonder then that the UWB stock was locked in the upper circuit filter throughout the day on the bourses.

Following its moratorium, UWB's share price had slumped by more than half to Rs 10 from Rs 22 in a day. However, in the next few sessions, the valuation came back to the pre-moratorium levels.

UWB made a loss of Rs 106 crore in FY06, which was more than the total profit it had made in the previous three years. So, the consideration of Rs 28, twice UWB's book value, is more than fair.

Given the difficulty in obtaining branch licences from the RBI, the UWB acquisition works well for IDBI. Now, it will be able to more than double its branch network "" from 195 branches to 425 branches.

UWB's 230 branches (119 metro and urban branches and 111 semi-urban and rural branches) will provide IDBI with access to a wide customer base in Maharashtra. With the acquisition cost at Rs 150 crore, IDBI will pay about Rs 65 lakh per branch, which seems reasonable.

In terms of size, UWB will add just 7.7 per cent to IDBI's June 2006 assets, and with a capital adequacy of 14 per cent, IDBI will not have any problem absorbing UWB.

However, IDBI will also have to absorb UWB's 3,000 employees, which will take its total staff strength to over 7,500.

Though the merger with IDBI Bank has helped improve retail assets, which were at 18 per cent of total assets, the number is much lower than that of private sector banks and even SBI's 26 per cent. With UWB, IDBI can hope to raise the figure.

In the June 2006 quarter, IDBI's net interest income expanded 7.2 per cent y-o-y to Rs 97.17 crore. Its cost of funds reduced by 53 basis points to 6.61 per cent, as IDBI had replaced high-cost bonds and deposits with low-cost deposits after June 2005.

However, low-cost deposits, comprising current and savings accounts, decreased by 400 basis points to 26 per cent at the end of June 2006 over March quarter. Other income went up 6 per cent y-o-y in Q1FY07.

Also, a 6 per cent reduction in expenses resulted in its operating profit rising 22 per cent. IDBI has appreciated 40 per cent in the past two months, and trades at about 0.7 times its estimated FY07 book value.

On Wednesday, the stock market cheered IDBI's purchase adding Rs 650 crore or 14.5 per cent to its market cap, which seems unsustainable considering the clean-up task ahead.

Patel Engineering: Booster in MEPL buy

Patel Engineering has acquired Michigan Engineers (MEPL) for an undisclosed sum. Patel Engineering's expertise includes constructing dams, tunnels, roads and ports, while MEPL's focus is on urban infrastructure like sewer rehabilitation.

It is understood that MEPL's FY06 revenues amounted to Rs 40 crore. Senior officials at Patel Engineering say the company generated around 5 per cent of their revenues in FY06 from urban infrastructure projects and expect that the acquisition will help it ramp up the business.

Patel Engineering had come out with its follow-on issue in May 2006 at Rs 440 a share and raised Rs 425 crore. However, the stock currently trades at Rs 342 levels.

The company plans to use Rs 70 crore from the issue proceeds for capital equipment, while Rs 150 crore would be utilised for investments in infrastructure projects as well as acquisitions. So, Patel Engineering will not have a problem funding the purchase.

Meanwhile, in the June 2006 quarter, the company also benefited from the current upsurge in the capex cycle "" its consolidated operating profit grew 37.75 per cent y-o-y to Rs 33.75 crore, compared to a 30.7 per cent improvement in net sales to Rs 311.08 crore.

The operating profit margin also rose by 60 basis points y-o-y to 10.85 per cent in Q1FY07. Prior to this acquisition, Patel Engineering had an order book of about Rs 4,500 crore.

The stock trades at 21 times estimated FY07 earnings, while IVRCL Infrastructure gets a discounting of 25 times and Punj Lloyd trades at 36 times.